Financial Crimes Enforcement Network; Amendment to the Bank Secrecy Act Regulations-Requirement That Mutual Funds Report Suspicious Transactions, 26213-26220 [06-4177]

Agencies

• DEPARTMENT OF THE TREASURY
• Department of Treasury

[Federal Register Volume 71, Number 86 (Thursday, May 4, 2006)]
[Rules and Regulations]
[Pages 26213-26220]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-4177]


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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA37


Financial Crimes Enforcement Network; Amendment to the Bank 
Secrecy Act Regulations--Requirement That Mutual Funds Report 
Suspicious Transactions

AGENCY: Financial Crimes Enforcement Network, Department of the 
Treasury.

ACTION: Final rule.

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SUMMARY: This document amends the regulations implementing the statute 
generally known as the Bank Secrecy Act to require mutual funds to 
report suspicious transactions to the Financial Crimes Enforcement 
Network. The amendment constitutes a further step in the enhancement of 
the comprehensive system for the reporting of suspicious transactions 
by major categories of financial institutions operating in the United 
States, as a part of the Department of the Treasury's counter-money 
laundering program.

[[Page 26214]]


DATES: Effective Date: This final rule is effective June 5, 2006.
    Applicability Date: The requirements in this final rule apply to 
transactions occurring after October 31, 2006. See 31 CFR 103.15(g) of 
the final rule contained in this document.

FOR FURTHER INFORMATION CONTACT: Regulatory Policy and Programs 
Division, Financial Crimes Enforcement Network, (800) 949-2732.

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory Provisions

    The Bank Secrecy Act \1\ authorizes the Secretary of the Treasury 
(Secretary) to issue regulations requiring financial institutions to 
keep records and file reports that are determined to have a high degree 
of usefulness in criminal, tax, and regulatory matters, or in the 
conduct of intelligence or counter-intelligence activities, to protect 
against international terrorism, and to implement counter-money 
laundering programs and compliance procedures.\2\ The Secretary's 
authority to administer the Bank Secrecy Act has been delegated to the 
Director of the Financial Crimes Enforcement Network. Our regulations 
implementing the Bank Secrecy Act are codified at 31 CFR part 103.
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    \1\ Public Law 91-508, as amended, codified at 12 U.S.C. 1829b, 
12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314; 5316-5332.
    \2\ Language expanding the scope of the Bank Secrecy Act to 
intelligence or counter-intelligence activities to protect against 
international terrorism was added by section 358 of the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001 (the USA 
PATRIOT Act), Public Law 107-56.
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    With the enactment of 31 U.S.C. 5318(g) in 1992,\3\ Congress 
authorized the Secretary to require financial institutions to report 
suspicious transactions. As amended by the USA PATRIOT Act, subsection 
5318(g)(1) states that:

    \3\ 31 U.S.C. 5318(g) was added to the Bank Secrecy Act by 
section 1517 of the Annunzio-Wylie Anti-Money Laundering Act, Title 
XV of the Housing and Community Development Act of 1992, Public Law 
102-550; it was expanded by section 403 of the Money Laundering 
Suppression Act of Title IV of the Riegle Community Development and 
Regulatory Improvement Act of 1994, Public Law 103-325, to require 
designation of a single government recipient for reports of 
suspicious transactions.
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    The Secretary may require any financial institution, and any 
director, officer, employee, or agent of any financial institution, 
to report any suspicious transaction relevant to a possible 
violation of law or regulation.

    Subsection (g)(2)(A) provides further:

    If a financial institution or any director, officer, employee, 
or agent of any financial institution, voluntarily or pursuant to 
this section or any other authority, reports a suspicious 
transaction to a government agency--
    (i) The financial institution, director, officer, employee, or 
agent may not notify any person involved in the transaction that the 
transaction has been reported; and

    (ii) No officer or employee of the Federal Government or of any 
State, local, tribal, or territorial government within the United 
States, who has any knowledge that such report was made may disclose 
to any person involved in the transaction that the transaction has 
been reported, other than as necessary to fulfill the official 
duties of such officer or employee.

    Subsection (g)(3)(A) provides that neither a financial institution, 
nor any director, officer, employee, or agent of any financial 
institution

    That makes a voluntary disclosure of any possible violation of 
law or regulation to a government agency or makes a disclosure 
pursuant to this subsection or any other authority * * * shall * * * 
be liable to any person under any law or regulation of the United 
States or any constitution, law or regulation of any State or 
political subdivision of any State, or under any contract or other 
legally enforceable agreement (including any arbitration agreement), 
for such disclosure or for any failure to provide notice of such 
disclosure to the person who is the subject of such disclosure or 
any other person identified in the disclosure.

    Finally, subsection (g)(4) requires the Secretary, ``to the extent 
practicable and appropriate,'' to designate ``a single officer or 
agency of the United States to whom such reports shall be made.'' \4\ 
The designated agency is in turn responsible for referring any report 
of a suspicious transaction to ``any appropriate law enforcement, 
supervisory agency, or U.S. intelligence agency for use in the conduct 
of intelligence or counterintelligence activities, including analysis, 
to protect against international terrorism.'' \5\
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    \4\ This designation does not preclude the authority of 
supervisory agencies to require financial institutions to submit 
other reports to the same agency or another agency ``pursuant to any 
other applicable provision of law.'' See 31 U.S.C. 5318(g)(4)(C).
    \5\ See 31 U.S.C. 5318(g)(4)(B).
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B. Mutual Fund Regulation and Money Laundering

    This final rule applies to investment companies that are ``mutual 
funds,'' which are open-end management investment companies as 
described in the Investment Company Act of 1940 (15 U.S.C. 80a). Mutual 
funds are the predominant type of investment companies. As of September 
2005, investors held approximately $8.6 trillion in U.S. mutual fund 
shares, representing more than 95 percent of the assets held by 
investment companies regulated by the U.S. Securities and Exchange 
Commission (Commission).\6\ Currently, more than 2,400 active mutual 
funds are registered with the Commission.\7\
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    \6\ The staff of the Commission estimates, based on filings, 
that as of September 2005, approximately $8.6 trillion was invested 
in U.S. mutual funds (including $1 trillion invested in open-end 
management companies that fund variable life insurance and variable 
annuity contracts, and $259 billion invested in open-end management 
companies that are exchange-traded funds).
    \7\ Approximately 1,219 of these funds are ``series companies'' 
with an aggregate of 8,425 portfolios. A ``series company'' is a 
registered investment company that issues two or more classes or 
series of preferred or special stock, each of which is preferred 
over all other classes or series with respect to assets specifically 
allocated to that class or series. 17 CFR 270.18f-2. The assets 
allocated to such a class or series are commonly known as a 
``portfolio.'' The series or portfolios of a series company operate, 
for many purposes, as separate investment companies.
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    This final rule is part of a series of steps that we are taking to 
address comprehensively the risk of money laundering through mutual 
funds. In April 2002, we issued an interim final rule to implement 
section 352 of the USA PATRIOT Act. The interim final rule required 
mutual funds to develop and implement anti-money laundering programs 
designed to prevent them from being used to launder money or finance 
terrorist activities, which includes achieving and monitoring 
compliance with the applicable requirements of the Bank Secrecy Act and 
its implementing regulations.\8\ In May 2003, we issued, jointly with 
the Commission, a final rule to implement section 326 of the USA 
PATRIOT Act, requiring mutual funds to implement reasonable procedures 
to: (1) Verify the identity of any person seeking to open an account, 
to the extent reasonable and practicable; (2) maintain records of the 
information used to verify the person's identity; and (3) determine 
whether the person appears on any lists of known or suspected 
terrorists or terrorist organizations provided to investment companies 
by any federal government agency and designated as such by the 
Department of the Treasury in consultation with federal functional 
regulators.\9\
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    \8\ See 67 FR 21117 (Apr. 29, 2002).
    \9\ See 68 FR 25131 (May 9, 2003) text accompanying notes 116-
117. Under the final rule, a mutual fund may contractually delegate 
the implementation and operation of its customer identification 
program to a service provider such as a transfer agent, although the 
mutual fund would continue to be responsible for compliance with 
applicable requirements.

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[[Page 26215]]

    This final rule follows other recent actions that expand the 
application of requirements that financial institutions report 
suspicious activity. Since April 1996, we have issued rules under the 
authority of 31 U.S.C. 5318(g) requiring banks, thrifts, and other 
banking organizations to report suspicious activity.\10\ In 
collaboration with us, the federal bank supervisory agencies 
concurrently issued suspicious activity reporting rules under their own 
authority, applying to banks, bank holding companies, and non-
depository institution affiliates and subsidiaries of banks and bank 
holding companies.\11\ Since the beginning of 2002, we have required 
certain money services businesses to report suspicious activity.\12\ We 
adopted final rules for the reporting of suspicious activity applicable 
to brokers or dealers in securities in July 2002,\13\ to casinos and 
card clubs in September 2002,\14\ to currency dealers and exchangers in 
February 2003,\15\ to futures commission merchants and introducing 
brokers in commodities in November 2003,\16\ and to insurance companies 
in November 2005.\17\ This final rule extends suspicious activity 
reporting to mutual funds. Suspicious activity reporting by mutual 
funds is expected to provide highly useful information in law 
enforcement and regulatory investigations and proceedings, as well as 
in the conduct of intelligence activities to protect against 
international terrorism.\18\
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    \10\ See 31 CFR 103.18 (requiring banks, thrifts, and other 
banking organizations to report suspicious transactions).
    \11\ See 12 CFR 21.11 (issued by the Office of the Comptroller 
of the Currency); 12 CFR 208.62 (issued by the Board of Governors of 
the Federal Reserve System); 12 CFR 353.3 (issued by the Federal 
Deposit Insurance Corporation); 12 CFR 563.180 (issued by the Office 
of Thrift Supervision); 12 CFR 748.1 (issued by the National Credit 
Union Administration).
    \12\ See 31 CFR 103.20 (requiring money transmitters and 
issuers, sellers, and redeemers of money orders and traveler's 
checks to report suspicious transactions).
    \13\ See 67 FR 44048 (July 1, 2002). In 2003, broker-dealers 
filed 4,267 Suspicious Activity Reports, 5.7% of which (242 reports) 
involved money market funds and 6.3% of which (268 reports) involved 
other mutual funds. In the first six months of 2004, of 2,612 
reports filed by broker-dealers, 5.3% (139 reports) involved money 
market funds and 6.2% (162 reports) involved other mutual funds. 
Financial Crimes Enforcement Network, The SAR Activity Review--By 
the Numbers (Issue 3, December 2004).
    \14\ See 67 FR 60722 (September 26, 2002).
    \15\ See 68 FR 6613 (February 10, 2003).
    \16\ See 68 FR 65392 (November 20, 2003).
    \17\ See 70 FR 66761 (November 3, 2005).
    \18\ See 31 U.S.C. 5311 (stating purpose of the reporting 
authority under the Bank Secrecy Act).
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II. Notice of Proposed Rulemaking

    On January 21, 2003, we published a Notice of Proposed Rulemaking 
(Proposed Rule), proposing an amendment to the regulations implementing 
the Bank Secrecy Act that would extend the requirement to report 
suspicious activity to mutual funds.\19\ The comment period for the 
Proposed Rule ended on March 24, 2003. We received five comment 
letters: Three from trade associations, and one each from a regulatory 
advocacy group and an academic society at a university. These comments 
are discussed below in the Section-by-Section Analysis.
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    \19\ See 68 FR 2716 (January 21, 2003).
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III. Section-by-Section Analysis

A. Section 103.15(a)--Reports by Mutual Funds of Suspicious 
Transactions

    Section 103.15(a) sets forth the obligation of mutual funds to 
report suspicious transactions that are conducted or attempted by, at, 
or through a mutual fund and that involve or aggregate at least $5,000 
in funds or other assets.\20\ The obligation to report a transaction 
under this rule and 31 U.S.C. 5318(g) applies whether or not the 
transaction involves currency.\21\ We are aware that the use of 
currency in mutual funds transactions is rare.
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    \20\ A mutual fund is already obligated to report the receipt of 
cash (and certain cash-related instruments) totaling more than 
$10,000 in one transaction or two or more related transactions. See 
67 FR at 21119. 26 U.S.C. 6050I requires a person to report 
information about such transactions to the Internal Revenue Service; 
31 U.S.C. 5331 requires a person to report information about similar 
transactions to us. One commenter expressed concern over some mutual 
funds or their transfer agents being required to file both a report 
under this final rule and a report under 26 U.S.C. 6050I (``Form 
8300'') because they are considered to be ``nonfinancial trades or 
businesses.'' The commenter expressed concern about both duplication 
of reporting and conflicting disclosure provisions, because 26 CFR 
1.6050I-1(f) requires notifying the subject of a report that the 
amount of cash in the transaction(s) is being reported to the 
Internal Revenue Service, whereas section 103.15(d) of this final 
rule prohibits notifying the subject of a Suspicious Activity Report 
that the transaction has been reported. With regard to the concern 
over duplication of reporting, we note that the forms serve 
different purposes and are required under different circumstances. 
Form 8300 is designed to provide information about large cash (and 
certain non-cash instrument) transactions received by a business. 
The triggering factors are entirely objective. On the other hand, 
the Suspicious Activity Report is designed to provide information 
about transactions and activity that the reporting entity knows, 
suspects, or has reason to suspect may be a violation of law or 
regulation. The triggering factors for the Suspicious Activity 
Report are largely subjective. While it is possible that a 
particular transaction may trigger the filing of both forms, and 
while some of the information provided may overlap, the purposes for 
the filings and the ways in which the information will be used by 
law enforcement differ greatly. Furthermore, the filing of a Form 
8300 does not presume the filing of a Suspicious Activity Report, 
and vice versa. Moreover, with regard to the concern over 
conflicting disclosure requirements, we note that there is nothing 
in the requirement for disclosure of the filing of a report under 26 
U.S.C. 6050I that would require disclosure of the filing of a 
Suspicious Activity Report. In fact, a mutual fund is prohibited 
from intentionally or unintentionally disclosing the filing of a 
Suspicious Activity Report when it discloses the filing of a report 
of the receipt of cash or certain non-cash instruments, as required 
by 26 CFR 1.6050I-1(f).
    \21\ Many currency transactions are not indicative of money 
laundering or other violations of law, a fact recognized both by 
Congress, in authorizing reform of the currency transaction 
reporting system, and by us, in issuing rules to implement that 
system (see 31 U.S.C. 5313(d) and 31 CFR 103.22(d), 63 FR 50147 
(September 21, 1998)). Many non-currency transactions (for example, 
transmittals of funds) can indicate illicit activity, especially in 
light of the breadth of the statutes that make money laundering a 
crime. See 18 U.S.C. 1956 and 1957.
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    The obligation extends to transactions conducted or attempted by, 
at, or through, the mutual fund. However, section 103.15(a) also 
contains language designed to encourage the reporting of transactions 
that appear relevant to violations of law or regulation, even in cases 
in which the rule does not explicitly so require (for example, in the 
case of a transaction falling below the $5,000 threshold in the rule).
    Section 103.15(a) contains the general statement regarding a mutual 
fund's obligation to file reports of suspicious transactions with us. 
To clarify that the final rule creates a reporting requirement that is 
uniform with that for other financial institutions, section 
103.15(a)(1), which is unchanged from the proposed rule, incorporates 
language from the suspicious activity reporting rules applicable to 
other financial institutions, such as banks, broker-dealers, casinos, 
and money services businesses, requiring the reporting of ``any 
suspicious transaction relevant to a possible violation of law or 
regulation.'' Further, a mutual fund may also report ``any suspicious 
transaction that it believes is relevant to a possible violation of any 
law or regulation but whose reporting is not required'' by the final 
rule. For example, a mutual fund may report a suspected violation of 
law that involves less than $5,000. Such voluntary reporting would be 
subject to the same protection from liability as mandatory reporting 
pursuant to 31 U.S.C. 5318(g)(3).
    The final rule requires reporting by mutual funds, but not by 
affiliated persons of mutual funds. This approach is consistent with 
our other rules requiring the reporting of suspicious activity.
    Mutual funds typically conduct many operations through separate 
entities, which may or may not be affiliated

[[Page 26216]]

persons of the mutual fund. These separate entities include investment 
advisers, principal underwriters, administrators, custodians, transfer 
agents, and other service providers. Personnel of these separate 
entities may be in the best position to perform the reporting 
obligation, and a mutual fund may contract with an affiliated or 
unaffiliated service provider to perform the reporting obligation as 
the fund's agent. In such cases, however, the mutual fund remains 
responsible for assuring compliance with the rule, and therefore must 
actively monitor the performance of its reporting obligations.\22\ The 
fund should take steps to assure that the service provider has 
implemented effective compliance policies and procedures administered 
by competent personnel, and should maintain an active working 
relationship with the service provider's compliance personnel.\23\
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    \22\ Under 17 CFR 270.38a-1, each mutual fund must appoint a 
chief compliance officer, reporting directly to the mutual fund's 
board of directors, to administer its compliance policies and 
procedures. See 68 FR 74714 (December 24, 2003).
    \23\ For a discussion of the oversight responsibilities of 
mutual funds over their service providers, see Compliance Programs 
of Investment Companies and Investment Advisers, supra note 22, 
nn.91-92 and accompanying text.
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    Section 103.15(a)(2), which is also unchanged from the Proposed 
Rule, requires the reporting of suspicious activity that involves or 
aggregates at least $5,000 in funds or other assets. The suspicious 
activity reporting rules, however, are not intended to operate (and 
indeed cannot properly operate) in a mechanical fashion. Rather, such 
requirements are intended to function in such a way as to have 
financial institutions evaluate customer activity and relationships for 
money laundering risks.\24\
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    \24\ For example, transactions involving investments by the 
pension fund of a publicly traded corporation, even though involving 
a large dollar amount, would likely require more limited scrutiny 
than less typical transactions, such as those involving customers 
who wish to use currency or money orders to purchase mutual fund 
shares, even though the dollar amounts in those latter cases may be 
relatively small.
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    Section 103.15(a)(2) specifies four categories of transactions that 
require reporting if the mutual fund knows, suspects, or has reason to 
suspect that any such category applies to a transaction, or a pattern 
of transactions of which the transaction is a part. The ``knows, 
suspects, or has reason to suspect'' standard incorporates a concept of 
due diligence into the reporting requirement.
    The first category, described in section 103.15(a)(2)(i), includes 
transactions involving funds derived from illegal activity, or intended 
or conducted in order to hide or disguise funds derived from such 
illegal activity as part of a plan to violate or evade any federal law 
or regulation or to avoid any transaction reporting requirement under 
federal law or regulation. The second category, described in section 
103.15(a)(2)(ii), includes transactions designed, whether through 
structuring or other means, to evade the requirements of the Bank 
Secrecy Act. The third category, described in section 
103.15(a)(2)(iii), includes transactions that appear to serve no 
business or apparent lawful purposes, and for which the mutual fund 
knows of no reasonable explanation after examining the available facts 
relating to the transaction and the parties. The fourth category, 
described in section 103.15(a)(2)(iv), includes any other transactions 
that involve the use of the mutual fund to facilitate criminal 
activity.\25\
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    \25\ The fourth reporting category has been added to the 
suspicious activity reporting rules promulgated since the passage of 
the USA PATRIOT Act to make it clear that the requirement to report 
suspicious activity encompasses the reporting of transactions in 
which legally derived funds are used for criminal activity, such as 
the financing of terrorism.
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    In determining whether to file a Suspicious Activity Report, a 
mutual fund must base the determination on all of the facts and 
circumstances relating to the transaction and the customer in 
question.\26\ Different fact patterns will require different types of 
judgments. In some cases, the facts of the transaction may indicate the 
need to file a Suspicious Activity Report. For example, if a mutual 
fund closes the account and redeems the shares of a customer whose 
identity the fund is unable to verify under its customer identification 
program,\27\ the fund should consider whether the circumstances 
surrounding its failure to verify would warrant the filing of a 
Suspicious Activity Report. In these and other situations, the fact 
that a customer refuses to provide information necessary for the mutual 
fund to verify the customer's identity, make reports, or keep records 
required by this part or other regulations, provides information that 
the mutual fund determines to be false, or seeks to change or cancel a 
transaction after such person is informed of information verification 
or recordkeeping requirements relevant to the transactions, would 
indicate the probability that a Suspicious Activity Report should be 
filed.\28\ In other situations, determining whether a transaction is 
suspicious within the meaning of the rule may require more involved 
judgment. Transactions that raise the need for such judgment may 
include, for example: (1) Transmission or receipt of funds transfers 
without normal identifying information, or in a manner that may 
indicate an attempt to disguise or hide the country of origin or 
destination, or the identity of the customer sending the funds, or the 
beneficiary to which the funds are sent; or (2) repeated use of a 
mutual fund as a temporary resting place for funds from multiple 
sources without a clear business (including investment) purpose. The 
judgments involved will also extend to whether the facts and 
circumstances and the institution's knowledge of its customer provide a 
reasonable explanation for the transaction that removes it from the 
suspicious category.\29\
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    \26\ In the case of a transaction conducted through an omnibus 
account maintained by an intermediary, a mutual fund may not know, 
suspect, or have reason to suspect that the transaction is one for 
which reporting would be required, because a fund typically has 
little or no information about individual customers of the 
intermediary. An omnibus account is usually maintained by another 
financial institution, such as a broker-dealer, that has a reporting 
obligation with regard to its customers. The omnibus account holder 
(i.e., the financial institution intermediary) is a customer of the 
mutual fund for purposes of the final rule. An omnibus account 
maintained for a foreign financial institution would be considered a 
correspondent account under section 312 of the USA PATRIOT Act, and 
as such, is subject to due diligence and possibly enhanced due 
diligence requirements under that section of the Act and 
implementing regulations. See Anti-Money Laundering Programs; 
Special Due Diligence for Certain Foreign Accounts, 71 FR 496 (Final 
Rule) and 71 FR 516 (Notice of Proposed Rulemaking) (January 4, 
2006).
    \27\ See supra note 9 and accompanying text.
    \28\ As section 103.15(d) of the final rule makes clear, the 
mutual fund must not notify the customer that it intends to file or 
has filed a Suspicious Activity Report with respect to the 
customer's activity.
    \29\ One commenter expressed concern that a mutual fund would be 
expected to obtain additional information that it does not already 
have to meet the ``knows, suspects, or has reason to suspect'' 
standard of section 103.15(a)(2). We expect funds to determine 
whether to file a Suspicious Activity Report based on the 
information obtained in the account opening process or subsequently 
in the course of processing transactions.
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    The means of commerce and the techniques of money launderers are 
continually evolving, and it is not possible to provide an exhaustive 
list of suspicious transactions. We intend to continue our dialogue 
with the mutual fund industry about the manner in which a combination 
of government guidance, training programs, and government-industry 
information exchange can facilitate operation of the new suspicious 
activity reporting system in as flexible and cost-efficient a way as 
possible.

[[Page 26217]]

    Individual mutual funds are frequently part of a complex of related 
funds, and it is possible that more than one mutual fund would be 
obligated to report the same transaction or transactions. In order to 
clarify the permissibility of joint reports, section 103.15(a)(3) of 
the final rule has been revised to permit all of the mutual funds 
involved in a particular transaction to file a single joint report. 
Because the Suspicious Activity Report by Securities and Futures 
Industries (``Form SAR-SF'') accommodates the name of only one filer, 
only one of the filing institutions should be identified as the 
``filer'' in the filer identification section of the form.\30\ The 
narrative section of the Form SAR-SF must include the words ``joint 
filing'' and identify the other mutual funds on whose behalf the report 
is being filed. The joint report must contain all relevant facts, and 
each mutual fund must maintain a copy of the joint report, along with 
any supporting documentation.\31\ A service provider who performs 
reporting obligations under contract with multiple mutual funds may 
file a single joint report on behalf of all of the funds involved in a 
transaction or series of transactions.\32\
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    \30\ The term ``SF'' is an abbreviation for ``Securities and 
Futures Industries,'' the form that is used for reporting by members 
of the securities and futures industries. See 67 FR 50751 (August 5, 
2002). The form became final on December 26, 2002, and is available 
on our Web site at https://www.fincen.gov/reg_bsaforms.html.
    \31\ The filer should not submit supporting documentation with 
the Form SAR-SF. See infra note 38 and accompanying text.
    \32\ See supra note 22 and accompanying text.
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    Further, section 103.15(a)(3) of the final rule has been revised to 
also recognize that other financial institutions, such as broker-
dealers in securities, may have separate obligations to report the same 
suspicious activity under other Bank Secrecy Act regulations.\33\ In 
those instances, it is permissible for either a mutual fund or the 
other financial institution to file a single joint report on behalf of 
all of the mutual fund(s) and other financial institution(s) involved 
in the transaction. As with a joint report filed by a mutual fund on 
behalf of other mutual funds, the joint report filed must contain all 
relevant facts, and the narrative of the Form SAR-SF must include the 
words ``joint filing'' and must identify the other financial 
institutions on whose behalf the report is being filed.
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    \33\ See 31 CFR 103.19.
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    One commenter requested that this final rule clarify that it will 
not impose a duplicative reporting requirement on insurance companies, 
because a single transaction may create a reporting requirement for 
both an insurance company, under the rule applicable to insurance 
companies,\34\ and for a separate account of the insurance company that 
issues variable insurance products, under this rule. Because this rule 
applies only to open-end management investment companies, it does not 
apply to separate accounts that are organized as unit investment 
trusts, which comprise a majority of the separate accounts that issue 
variable insurance products. Accordingly, the rule applies only to a 
separate account that is organized as a managed separate account. To 
avoid the possibility of duplicative suspicious activity reporting, we 
are contemporaneously amending the rule applicable to insurance 
companies to require an insurance company that issues variable 
insurance products funded by separate accounts that meet the definition 
of a mutual fund to report suspicious activity pursuant to this final 
rule.\35\ In addition, a registered broker-dealer involved in a 
suspicious transaction may file a joint report on behalf of any 
separate account under section 103.15(a)(3).
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    \34\ See 31 CFR 103.16.
    \35\ See 31 CFR 103.16(b)(3)(iii).
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    When a mutual fund or other financial institution files or 
considers filing a joint report on behalf of other mutual funds, it 
typically will exchange information with the other entities to 
determine whether the transaction must be reported under this section, 
and, if so, to determine which party should file the report, provide 
the filer with comprehensive information and supporting documentation, 
and provide confirmation of the filing to each mutual fund (and other 
financial institution) involved in the transaction. Prior to filing a 
joint report, a mutual fund may share information pertaining to a 
suspicious transaction with any other financial institution or service 
provider involved in the transaction, provided that such financial 
institution or service provider will not be the subject of the report. 
Such sharing of information does not violate the non-disclosure 
provisions of section 103.15(d ).\36\ If a service provider is 
performing the reporting obligations of one or more mutual funds under 
contract with the fund(s), the service provider may similarly share the 
information as an agent of the mutual fund(s).\37\ However, after the 
report is filed, further disclosure of the fact that a suspicious 
activity report was filed is prohibited, except as permitted by section 
103.15(d). The cross-reference in section 103.15(d) to section 
103.15(a)(3) in the Proposed Rule remains in the final rule.
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    \36\ See Section III.D. infra.
    \37\ For a discussion of the types of service providers that may 
perform reporting obligations under contract with mutual funds, see 
supra note 22 and accompanying text.
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B. Section 103.15(b)--Filing Procedures

    Section 103.15(b), unchanged from the proposed rule except as noted 
in footnote 39 below, directs mutual funds to report suspicious 
activities by completing a Form SAR-SF, and sets forth the filing 
procedures to be followed by mutual funds making reports of suspicious 
activity. Within 30 days after initial detection of a suspicious 
activity by a mutual fund, the fund must report the transaction by 
completing a Form SAR-SF, collecting and maintaining supporting 
documentation, and filing the form as indicated in the instructions to 
the form. The filer should not submit the supporting documentation with 
the Form SAR-SF. Form SAR-SF is the same form used by broker-dealers, 
futures commission merchants, and introducing brokers in 
commodities.\38\ If a separate entity that is not a financial 
institution files a Form SAR-SF as agent for a mutual fund, that entity 
should designate the mutual fund as the reporting financial institution 
on the Form SAR-SF.
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    \38\ See 67 FR 70808 (November 26, 2002) (effective January 1, 
2003).
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    If the mutual fund does not identify a suspect on the date of the 
initial detection, it may delay filing a Form SAR-SF for 30 days, but 
may not delay filing more than 60 days after the date of such initial 
detection. In situations involving violations that require immediate 
attention, such as suspected terrorist financing or ongoing money 
laundering schemes, a mutual fund must notify an appropriate law 
enforcement authority by telephone in addition to filing a Form SAR-
SF.\39\ A mutual fund may also, but is not required to, contact the 
Commission in such situations. A mutual fund that chooses to contact 
the Commission should contact its Office of Compliance Inspections and 
Examinations. In addition, we wish to remind mutual funds of our 
Financial Institutions Hotline (1-866-556-3974), which financial 
institutions may use to voluntarily report suspicious activity that may 
relate to terrorist financing. Mutual funds that report suspicious 
activity by calling the Financial

[[Page 26218]]

Institutions Hotline must also file a timely Form SAR-SF to the extent 
required by this final rule.
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    \39\ The final rule has been revised to make such notification 
mandatory, to be consistent with the reporting rules for other 
financial institutions. See, e.g., 31 CFR 103.18(b)(3), 
103.19(b)(3), and 103.16(c)(3).
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C. Section 103.15(c)--Retention of Records

    Section 103.15(c) requires that a mutual fund maintain copies of 
Suspicious Activity Reports that it files or that are filed on its 
behalf (including joint reports), and the original (or business record 
equivalent) and copies of related documentation, for a period of five 
years from the date of filing. The final rule has been modified to 
include references to reports filed on behalf of the fund (e.g., by a 
service provider) and joint reports (whether filed by the fund or by 
another financial institution naming the fund). The Suspicious Activity 
Report and the supporting documentation are to be made available to the 
Financial Crimes Enforcement Network, the Commission, and other 
appropriate law enforcement and regulatory authorities. The final rule 
also has been modified to add a self-regulatory organization registered 
with the Commission in those cases where a mutual fund maintains 
supporting documentation concerning a joint Suspicious Activity Report 
involving a broker-dealer being examined pursuant to 31 CFR 103.19(g).

D. Section 103.15(d)--Confidentiality of Reports

    Section 103.15(d) reflects the statutory prohibition against the 
disclosure of information filed in, or the fact of filing, a Suspicious 
Activity Report, except to the extent permitted by paragraph (a)(3). 
The final rule has been revised to clarify that the prohibition applies 
whether the report is required by the final rule or is filed 
voluntarily. See 31 U.S.C. 5318(g)(2). Section 103.15(d) extends the 
prohibition to any mutual fund subpoenaed or otherwise required to 
disclose a Suspicious Activity Report or information contained in a 
Form SAR-SF. Thus, section 103.15(d) specifically prohibits persons 
filing Suspicious Activity Reports (including persons on whose behalf a 
report has been filed) from disclosing, except to the Financial Crimes 
Enforcement Network, the Commission, or another appropriate law 
enforcement or regulatory agency, or a self-regulatory organization 
registered with the Securities and Exchange Commission conducting an 
examination of a broker-dealer pursuant to 31 CFR 103.19(g), that a 
Suspicious Activity Report has been filed or from providing any 
information that would disclose that a report has been prepared or 
filed. The final rule has been modified to note that the prohibition 
also applies to joint reports.
    Section 103.15(d) does not prohibit a mutual fund from engaging in 
discussions with any other financial institution or service provider 
involved in the transaction, other than the person who is or is 
expected to be the subject of the report, to determine whether the 
transaction must be reported under this section; to determine which 
party will file the report, provide the filer with comprehensive 
information and supporting documentation; and to provide confirmation 
of the filing to each mutual fund involved in the transaction.\40\ 
Similarly, this provision does not prohibit a service provider who 
performs reporting obligations under contract with one or more mutual 
funds from sharing information as an agent of the mutual fund(s). In 
addition, we have issued regulations under section 314(b) of the USA 
PATRIOT Act to permit certain financial institutions, after providing 
notice to us, to share information with one another solely for the 
purpose of identifying and reporting to the federal government 
activities that may involve money laundering or terrorist activity.\41\ 
Neither section 314(b) nor its implementing regulations, however, apply 
to the sharing of a Suspicious Activity Report with another financial 
institution. However, as described in Sections III.A. and III.C., a 
Suspicious Activity Report may be shared between financial institutions 
for the purposes of jointly filing and maintaining a record of such a 
report.
---------------------------------------------------------------------------

    \40\ See 31 CFR 103.15(a)(3).
    \41\ See 31 CFR 103.110.
---------------------------------------------------------------------------

E. Section 103.15(e)--Limitation of Liability

    Section 103.15(e) restates the broad statutory protection from 
liability for making reports of suspicious activity and for failure to 
disclose the fact of such reporting, whether the report is required by 
the final rule or is filed voluntarily. As amended by section 351 of 
the USA PATRIOT Act, 31 U.S.C. 5318(g)(3) provides a safe harbor from 
liability to any financial institution that makes a voluntary 
disclosure of any possible violation of law or regulation to a 
government agency, and to any financial institution that reports 
suspicious activity pursuant to section 5318(g) or pursuant to any 
other authority. Section 5318(g)(3) provides further protection from 
liability for the non-disclosure of the fact of such reporting. We note 
that the safe harbor extends to agents of the mutual fund filing 
reports, including transfer agents and other service providers. The 
final rule was modified to state the safe harbor in terms of a 
protection from liability and to include joint reports within the safe 
harbor.

F. Section 103.15(f)--Examinations and Enforcement

    Section 103.15(f), which is unchanged from the proposed rule, 
provides that the Department of the Treasury, through the Financial 
Crimes Enforcement Network or its delegatees, will examine compliance 
with the obligation to report suspicious activity, and that failure to 
comply with the rule may constitute a violation of the Bank Secrecy Act 
and the Bank Secrecy Act regulations. The Department of the Treasury 
has delegated to the Commission its authority to examine mutual funds 
for compliance.\42\ In reviewing any particular failure to report a 
transaction as required by this section, the Financial Crimes 
Enforcement Network and the Commission may take into account the 
relationship between the particular failure to report and the adequacy 
of the implementation and operation of a mutual fund's compliance 
procedures.
---------------------------------------------------------------------------

    \42\ See 31 CFR 103.56(b)(6) (delegating authority to examine 
investment companies to the Commission).
---------------------------------------------------------------------------

G. Section 103.15(g)--Effective Date

    Section 103.15(g) provides that the rule applies to transactions 
occurring after October 31, 2006.

IV. Regulatory Flexibility Act

    It is hereby certified that this final regulation will not have a 
significant economic impact on a substantial number of small entities. 
Registered investment companies, regardless of their size, are 
currently subject to the Bank Secrecy Act. Procedures currently in 
place at mutual funds to comply with existing Bank Secrecy Act rules 
should help mutual funds to identify suspicious activity and small 
mutual funds may have an established and limited customer base whose 
transactions are well known to the fund. Moreover, as indicated below 
in Section VI, the estimated burden associated with reporting 
suspicious transactions is minimal.

V. Executive Order 12866

    The Department of the Treasury has determined that this final 
regulation is not a significant regulatory action under Executive Order 
12866.

VI. Paperwork Reduction Act

    The collection of information contained in this final regulation 
has been approved by the Office of Management and Budget in accordance

[[Page 26219]]

with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under 
control number 1506-0019. The estimated average burden associated with 
the collection of information in this final rule is four hours per 
respondent. We received no comment on its recordkeeping burden 
estimate.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be directed to Desk Officer 
for the Department of the Treasury, Office of Information and 
Regulatory Affairs, Office of Management and Budget, Washington, DC 
20503 (or by the electronic mail to ahunt@eop.omb.gov).
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.

List of Subjects in 31 CFR Part 103

    Administrative practice and procedure, Authority delegations 
(Government agencies), Securities, Currency, Investigations, Law 
enforcement, Reporting and recordkeeping requirements.

Amendments to the Regulations

0
For the reasons set forth above in the preamble, 31 CFR part 103 is 
amended as follows:

PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND 
FOREIGN TRANSACTIONS

0
1. The authority citation for part 103 continues to read as follows:

    Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 
and 5316-5332; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.

Subpart B--[Amended]

0
2. In subpart B, Sec.  103.15 is redesignated as Sec.  103.12.

0
3. In subpart B, a new Sec.  103.15 is added to read as follows:


Sec.  103.15  Reports by mutual funds of suspicious transactions.

    (a) General. (1) Every investment company (as defined in section 3 
of the Investment Company Act of 1940 (15 U.S.C. 80a-3) (``Investment 
Company Act'') that is an open-end company (as defined in section 5 of 
the Investment Company Act (15 U.S.C. 80a-5)) and that is registered, 
or is required to register, with the Securities and Exchange Commission 
pursuant to that Act (for purposes of this section, a ``mutual fund''), 
shall file with the Financial Crimes Enforcement Network, to the extent 
and in the manner required by this section, a report of any suspicious 
transaction relevant to a possible violation of law or regulation. A 
mutual fund may also file with the Financial Crimes Enforcement Network 
a report of any suspicious transaction that it believes is relevant to 
the possible violation of any law or regulation, but whose reporting is 
not required by this section. Filing a report of a suspicious 
transaction does not relieve a mutual fund from the responsibility of 
complying with any other reporting requirements imposed by the 
Securities and Exchange Commission.
    (2) A transaction requires reporting under this section if it is 
conducted or attempted by, at, or through a mutual fund, it involves or 
aggregates funds or other assets of at least $5,000, and the mutual 
fund knows, suspects, or has reason to suspect that the transaction (or 
a pattern of transactions of which the transaction is a part):
    (i) Involves funds derived from illegal activity or is intended or 
conducted in order to hide or disguise funds or assets derived from 
illegal activity (including, without limitation, the ownership, nature, 
source, location, or control of such funds or assets) as part of a plan 
to violate or evade any Federal law or regulation or to avoid any 
transaction reporting requirement under Federal law or regulation;
    (ii) Is designed, whether through structuring or other means, to 
evade any requirements of this part or any other regulations 
promulgated under the Bank Secrecy Act, Public Law 91-508, as amended, 
codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-
5314, 5316-5332;
    (iii) Has no business or apparent lawful purpose or is not the sort 
in which the particular customer would normally be expected to engage, 
and the mutual fund knows of no reasonable explanation for the 
transaction after examining the available facts, including the 
background and possible purpose of the transaction; or
    (iv) Involves use of the mutual fund to facilitate criminal 
activity.
    (3) More than one mutual fund may have an obligation to report the 
same transaction under this section, and other financial institutions 
may have separate obligations to report suspicious activity with 
respect to the same transaction pursuant to other provisions of this 
part. In those instances, no more than one report is required to be 
filed by the mutual fund(s) and other financial institution(s) involved 
in the transaction, provided that the report filed contains all 
relevant facts, including the name of each financial institution and 
the words ``joint filing'' in the narrative section, and each 
institution maintains a copy of the report filed, along with any 
supporting documentation.
    (b) Filing and notification procedures--(1) What to file. A 
suspicious transaction shall be reported by completing a Suspicious 
Activity Report by Securities and Futures Industries (``SAR-SF''), and 
collecting and maintaining supporting documentation as required by 
paragraph (c) of this section.
    (2) Where to file. Form SAR-SF shall be filed with the Financial 
Crimes Enforcement Network in accordance with the instructions to the 
Form SAR-SF.
    (3) When to file. A Form SAR-SF shall be filed no later than 30 
calendar days after the date of the initial detection by the reporting 
mutual fund of facts that may constitute a basis for filing a Form SAR-
SF under this section. If no suspect is identified on the date of such 
initial detection, a mutual fund may delay filing a Form SAR-SF for an 
additional 30 calendar days to identify a suspect, but in no case shall 
reporting be delayed more than 60 calendar days after the date of such 
initial detection.
    (4) Mandatory notification to law enforcement. In situations 
involving violations that require immediate attention, such as 
suspected terrorist financing or ongoing money laundering schemes, a 
mutual fund shall immediately notify by telephone an appropriate law 
enforcement authority in addition to filing timely a Form SAR-SF.
    (5) Voluntary notification to the Financial Crimes Enforcement 
Network or the Securities and Exchange Commission. Mutual funds wishing 
voluntarily to report suspicious transactions that may relate to 
terrorist activity may call the Financial Crimes Enforcement Network's 
Financial Institutions Hotline at 1-866-556-3974 in addition to filing 
timely a Form SAR-SF if required by this section. The mutual fund may 
also, but is not required to, contact the Securities and Exchange 
Commission to report in such situations.
    (c) Retention of records. A mutual fund shall maintain a copy of 
any Form SAR-SF filed by the fund or on its behalf (including joint 
reports), and the original (or business record equivalent) of any 
supporting documentation concerning any Form SAR-SF that it files (or 
is filed on its behalf), for a period of five years from the date of 
filing the Form SAR-SF. Supporting

[[Page 26220]]

documentation shall be identified as such and maintained by the mutual 
fund, and shall be deemed to have been filed with the Form SAR-SF. The 
mutual fund shall make all supporting documentation available to the 
Financial Crimes Enforcement Network, any other appropriate law 
enforcement agencies or federal or state securities regulators, and for 
purposes of an examination of a broker-dealer pursuant to Sec.  
103.19(g) regarding a joint report, to a self-regulatory organization 
(as defined in section 3(a)(26) of the Securities Exchange Act of 1934, 
15 U.S.C. 78c(a)(26)) registered with the Securities and Exchange 
Commission, upon request.
    (d) Confidentiality of reports. No mutual fund, and no director, 
officer, employee, or agent of any mutual fund, who reports a 
suspicious transaction under this part (whether such a report is 
required by this section or made voluntarily), may notify any person 
involved in the transaction that the transaction has been reported, 
except to the extent permitted by paragraph (a)(3) of this section. Any 
person subpoenaed or otherwise required to disclose a Form SAR-SF or 
the information contained in a Form SAR-SF, including a Form SAR-SF 
filed jointly with another financial institution involved in the same 
transaction (except where such disclosure is requested by the Financial 
Crimes Enforcement Network, the Securities and Exchange Commission, 
another appropriate law enforcement or regulatory agency, or, in the 
case of a joint report involving a broker-dealer, a self-regulatory 
organization registered with the Securities and Exchange Commission 
conducting an examination of such broker-dealer pursuant to Sec.  
103.19(g)), shall decline to produce Form SAR-SF or to provide any 
information that would disclose that a Form SAR-SF has been prepared or 
filed, citing this paragraph (d) and 31 U.S.C. 5318(g)(2), and shall 
notify the Financial Crimes Enforcement Network of any such request and 
its response thereto.
    (e) Limitation of liability. A mutual fund, and any director, 
officer, employee, or agent of such mutual fund, that makes a report of 
any possible violation of law or regulation pursuant to this section, 
including a joint report (whether such report is required by this 
section or made voluntarily) shall be protected from liability for any 
disclosure contained in, or for failure to disclose the fact of, such 
report, or both, to the extent provided in 31 U.S.C. 5318(g)(3).
    (f) Examinations and enforcement. Compliance with this section 
shall be examined by the Department of the Treasury, through the 
Financial Crimes Enforcement Network or its delegees, under the terms 
of the Bank Secrecy Act. Failure to satisfy the requirements of this 
section may constitute a violation of the reporting rules of the Bank 
Secrecy Act and of this part.
    (g) Effective date. This section applies to transactions occurring 
after October 31, 2006.
    4. Add Sec.  103.16(b)(3)(iii) to read as follows:


Sec.  103.16  Reports by insurance companies of suspicious 
transactions.

* * * * *
    (b) * * *
    (3) * * *
    (iii) An insurance company that issues variable insurance products 
funded by separate accounts that meet the definition of a mutual fund 
in Sec.  103.15(a)(1) shall file reports of suspicious transactions 
pursuant to Sec.  103.15.
* * * * *

    Dated: April 27, 2006.
Robert W. Werner,
Director, Financial Crimes Enforcement Network.
[FR Doc. 06-4177 Filed 5-3-06; 8:45 am]
BILLING CODE 4810-02-P